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3 Reasons Bed Bath & Beyond's Accelerated Stock Buyback Plans Are Brilliant

By James Brumley – Nov 4, 2021 at 6:55AM

Key Points

  • The retailer has access to more cash than it can meaningfully utilize in other ways.
  • Investments in areas like stores and systems have already set the stage for significant near-term EBITDA growth that will refill the company's coffers.
  • Prospective shareholders may want to let some of this bullish froth burn off before stepping into a new position.

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The arguments that this cash would be better spent in other ways don't quite hold up right here, right now.

Some investors clearly loved the news, given the stock's enormous rally in response to the announcement from home goods retailer Bed Bath & Beyond (BBBY 1.19%). On the other hand, a handful of pessimistic investors may doubt the wisdom of accelerating the company's $1 billion stock buyback program. That's a lot of money for a company still getting back on its feet, and a lot of money for a company also sitting on more than $1 billion worth of debt that could be dramatically reduced with those funds.

This is a case, however, where the seemingly less responsible decision to buy back outstanding shares of a company is actually a brilliant long-term move ... given its alternatives.

Person shopping for cookware in a home goods store.

Image source: Getty Images.

Smarter than it seems on the surface

On the off-chance you're reading this and haven't heard, Bed Bath & Beyond's $1 billion stock-repurchase authorization is so ahead of schedule that it should be completed before the end of this fiscal year.

The original plan was to wrap up these repurchases before the end of fiscal 2023 (ending in early 2024). Indeed, the company reported on Tuesday that $600 million of these buybacks had already been completed through the second quarter of this year, leaving only another $400 million to be done. Now CEO Mark Tritton wants to expand this year's buyback earmark from $325 million to $625 million, finishing up the effort as a result.

Share prices soared more than 90% in Tuesday's after-hours trading on the news, further buoyed by reports that the retailer will soon be working with Kroger as a sales partner, and at the same time will open up its e-commerce platform to more third-party brands. Most of that gain has since been given back, though it was still up roughly 15% by Wednesday's close, so clearly, some shareholders are celebrating the developments.

Still, another $300 million being committed to a stock repurchase program? That's a tough idea for some investors to digest.

The retailer is still rebuilding itself in an environment that's been altered by the pandemic, after all, and crimped by global supply chain woes. Although the company fares far better in the latter half of the year due to holiday shopping, through the first six months of the fiscal year ending in August, Bed Bath & Beyond has lost $124 million.

Operating cash flow is positive for the timeframe in question, but not impressively so. The company's core operation has yielded $46 million worth of cash flow for the six-month stretch in question, on sales of just a little less than $4 billion.

These aren't numbers that could be considered a smashing success, even if Tritton's turnaround plans appear to be working. This is instead a case where -- given that the money is clearly available -- it arguably makes more sense to pay down some of the company's near-$1.2 billion in long-term debt. Debt is a contractual obligation that must be eventually paid back, yet must also be serviced in the meantime. Reducing this debt would yield real, tangible benefits right now. The value of a buyback may or may not achieve the same.

Don't be too quick to jump to such a conclusion, though. An accelerated stock buyback is actually the best way to build shareholder value at this time. Here's why.

1. Bed Bath & Beyond has the cash, and few other needs: As of the end of August, Bed Bath & Beyond was sitting on right around $1 billion worth of liquidity. The company's regrouping efforts have also required some spending, like investments in stores and logistics systems. Many of those expenses have already been incurred and paid, though, with most of them being self-funding by virtue of widening margins; the retailer anticipates between $250 million and $350 million in EBITDA growth within three years solely from its top-down restructuring. Adding another $300 million to the repurchase program won't prevent the retailer from doing other things it should also be doing.

2. The retailer's debt isn't all that expensive: Broadly speaking, most organizations would prefer to operate debt-free. Bed Bath & Beyond's $1.2 billion in debt isn't choking the company, though. The retailer only spends about $70 million per year on interest expenses. Once it's firing on all cylinders again, it should be earning considerably more than that.

3. BBBY stock is cheap right now: Finally, an accelerated buyback makes a great deal of sense right now because Bed Bath & Beyond shares are considerably undervalued. Whereas the S&P 500 just touched an all-time record high, BBBY shares are currently trading right around where they were a year ago. The market's not giving the company any credit for a revitalization effort that certainly seems to be working. That weakness, however, isn't apt to last forever. Like any smart investor, the company is scooping up a stock while it's bargain-priced. It just happens to be its own stock.

A worthy buy once the dust settles

It's tempting to jump into a position right now, while shares have cooled off a bit from Tuesday's raging, red-hot rally. And perhaps more bullishness is indeed right around the corner.

If you don't feel comfortable piling into a stock in the midst of a volatile move, though, you're not crazy. Tuesday's announcements bolster the bullish argument to be sure, but it's also safe to let the proverbial dust settle a bit before taking any leap on this company.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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